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Friday, August 23, 2013

Markets edge higher on low volume

Dow went up 46, advancers ahead of decliners 2-1 & NAZ advanced 19. The MLP index rose 2 to the 444s & the REIT index 2+ to the 265s. Junk bond funds inched higher & Treasuries gained ground, especially for longer maturities. Oil
climbed after a drop in purchases of newly built US homes last
month bolstered speculation the Federal Reserve (FED) will defer
tapering stimulus measures. Gold jumped to a 11-week high after
sales of new US homes fell more than forecast, boosting
speculation that the FED will maintain fiscal
stimulus to aid the economy.

U.S. 3-month

U.S. 2-year

U.S. 10-year

The US central bank’s bond buying
is a less potent tool for stimulating growth than policy makers
believe, 2 economists said in a paper released today at a
FED conference. The paper scrutinizes the stance of some FED officials that
quantitative easing works thru a “portfolio-balance channel” in which FED asset purchases induce investors
to rebalance their investments to boost a wide range of
financial assets. The research was presented at an annual symposium in Jackson Hole, Wyoming. “The portfolio balance channel of QE works largely through
narrow channels that affect the prices of purchased assets, with
spillovers depending on particulars of the assets and economic
conditions,” Northwestern University finance professor Arvind Krishnamurthy & University of California-Berkeley professor
Annette Vissing-Jorgensen wrote in the paper. “It does not, as
the Fed proposes, work through broad channels such as affecting
the term premium on all long-term bonds.” The work has
influenced the debate at the FED before, with a previous paper
of theirs cited by Big Ben
last year in Jackson Hole that made the case for a 3rd round
of bond purchases, QE3. Despite working thru narrower channels, the buying
of mortgage-backed securities in QE3 has been more effective at
boosting the economy thru its effect on mortgage rates,
according to the paper.

Restaurant sales contracted in Jun & Jul, even as spending on
other discretionary categories such as automobiles & homes grew, a
sign some Americans remain budget conscious. Results at casual-dining establishments fell 3½%, following a 2% drop in Jun, according to the Knapp-Track Index. This marked the first 2 consecutive declines in sales after the industry was rocked by its
worst streak in almost 3 years between Dec & Feb. Preliminary data suggest that Aug sales still are weak, though
“better than July,” said Malcolm Knapp, a consultant who
created the index & has monitored the industry since 1970. The summer
slowdown is a symptom of a “reallocation nation,” in which people choose
between different discretionary items to purchase each month, he said. “Consumers’
priorities change every month based on what they can afford,” Knapp
said. Many Americans don’t eat out as often as they would like, &
they’ve had to cut back “very begrudgingly” on meals away from home to
help subsidize other purchases.

Debt ratings of the biggest banks may be cut by Moody’s
as it examines whether the U.S. would be less likely to ensure creditors
are repaid in a crisis, including Morgan Stanley (MS), Wells Fargo (WFC), Citigroup (C) & Bank of America (BAC - a Dow stock). Moody’s & S&P have said downgrades may be needed because the federal gov has
new tools to wind down banks instead of rescuing them with taxpayer
money. Those plans can include forcing debtholders to incur losses or
convert stakes to equity. The policies also may have an impact on
ratings of the companies’ deposit-taking subsidiaries. “In the
past year, we have seen progress towards establishing a framework to
credibly resolve these large systemically important banks,” Robert Young, a Moody’s managing director, said. The
reviews may lead to a 1 or 2 step downgrade at the banks depending
on the level of gov support built in to the ratings, Moody’s said. Bank stocks have been hot for more than a year, they are vulnerable to selling.

The big news today was Steve Ballmer retiring from Microsoft (MSFT - a Dow stock) after being with the company since its start. The stock jumped 2.37, hoping for better times from a new CEO. The financial biggies are meeting in Jackson Hole which will produce a lot of hot air about ending easy money by the FED. Next week will bring even slower trading days. Dow fell 71 last week.

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